Differences between adjustable and fixed loans
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With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate loan will increase very little.
When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Rapid Mortgage Solutions at (727) 527-1454 to learn more.
There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment can't increase beyond a fixed amount in a given year. Additionally, almost all adjustable programs have a "lifetime cap" — this cap means that the interest rate can't go over the cap amount.
ARMs most often have the lowest, most attractive rates toward the beginning. They usually provide the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.
You might choose an ARM to get a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call Joe Bell, mortgage broker, Rapid Mortgage Solutions at (727) 527-1454. It's our job to answer these questions and many others, so we're happy to help!